Wendy's Co (WEN) 2010 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Wendy's/Arby's Group's second quarter 2010 conference call.

Our hosts today are John Barker, Chief Communications Officer; Roland Smith, President and Chief Executive Officer; and Steve Hare, Chief Financial Officer.

At this time, all participants have been placed on a listen-only mode.

The floor will be opened for questions and comments following the presentation.

I would like to now turn the call over to John Barker.

You may begin, sir.

Thanks, Melissa.

Good afternoon, everyone.

Today's conference call and our webcast is accompanied by a PowerPoint presentation, which can be found on the Investor Relations page at our corporate website, and that's wendysarbys.com.

For those of you who are listening by the phone today, make sure you select the appropriate webcast player option from our website, and that will ensure that you can sync up the slides and the audio.

The agenda for today's conference call and the webcast will begin with remarks from our President and CEO, Roland Smith, who will discuss our second quarter highlights and some recent international developments.

Our Chief Financial Officer, Steve Hare, will then review our financial results in greater detail and discuss our 2010 outlook.

Following Steve's discussion, Roland will update you on our Wendy's and Arby's brands, and then we'll open up the line for questions.

I'd like to take a moment to summarize what is included in the financial statements, which are attached to today's earnings release.

There is a P&L that has consolidated second quarter 2010 results.

We also provided an update to our 2010 financial outlook.

Also included with today's release are key balance sheet items and a table that shows for the second quarter of 2010 EBITDA, a reconciliation of EBITDA to the reported net income, and to adjusted EBITDA which excludes integration-related cost.

We also provided selected financial highlights today for each brand, and that has same store sales, revenues, four wall EBITDA margin percent, and the total number of restaurants at quarter end.

In addition, we filed our Form 10-Q for Wendy's/Arby's Group this morning, and later today we will file our Form 10-Q for Wendy's/Arby's Restaurants, a subsidiary of Wendy's/Arby's Group.

Our Wendy's/Arby's Group 10-Q is filed in accordance with the SEC's XBRL mandate, and as such you will be able to access the interactive data at this time using the viewer that is included on our website.

Now before we begin, I'd like to refer you for just a moment to the Safe Harbor statement that is attached to today's release.

Certain information that we may discuss today regarding future performance such as financial goals, plans, and development is forward-looking.

Various factors could affect the Company's results and cause those results to differ materially from those expressed in our forward-looking statements.

Some of those factors are referenced in the Safe Harbor statement that is attached to the news release.

Also, some of the comments today will reference non-GAAP financial measures such as earnings before interest, taxes, depreciation, and amortization.

Investors should compare our reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure.

Now, let me turn the call over to Roland.

Thanks, John.

Good afternoon everyone, and thanks for joining us today.

As you all know, we are operating in a very challenging economic and competitive environment.

Unemployment, which remains high, is having a significant negative impact on the restaurant industry.

The unemployment rate in the US was 9.5% in July, and it's actually in the high teens for one of our key demographic targets, 18 to 24 year olds.

Consumer confidence, which also has a strong correlation to restaurant sales, dropped in June and July, and is now at 50%, which is no better than the rating for July 2009.

In addition to these two key factors, there are a number of other weak economic metrics such as retail sales, housing starts, and the trade deficit, which indicate that our economic recovery is going to be a slow process.

In addition to the troubling economic environment, we are also continuing to operate in a very competitive industry.

In today's marketplace, value messaging is proliferating.

As you can see from this slide, the restaurant industry is full of value propositions aimed at attracting today's price sensitive customers.

According to industry data, while overall QSR traffic is down for the sixth consecutive quarter, the only positive traffic gains have come from low priced deals, indicating that customers are allocating more of their dollars to value offers.

This value focus puts pressure on margins and limits price increases.

Even in this challenging environment, we produced positive adjusted EBITDA growth in the second quarter.

Now let me review the highlights of our second quarter results.

We are pleased to have produced adjusted EBITDA growth of 3.2% to almost $121 million for the second quarter.

At Wendy's, we improved Company-operated restaurant margins by 50 basis points compared to the same quarter a year ago.

At Arby's, we continue to focus on our turnaround plan and emphasized our new Everyday Value Menu.

While same store sales and average check declined in the second quarter, we achieved flat comparable transactions versus a year ago, which is very encouraging compared to trends over the past year.

We also effectively controlled G&A, as costs decreased 13.5% to $97.5 million in the quarter.

Next I'd like to share further details about Wendy's second quarter results.

In April, we promoted our $2.99 Deluxe Value Meals to attract customers focused on both quality and value.

In May, we expanded our successful Boneless Wings line by adding a new Spicy Chipotle flavor, and in June we returned to a value focus by introducing two new BBQ Bacon sandwiches to our $2.99 Deluxe Value Meals lineup.

Our second quarter systemwide same store sales decreased 1.7%, and while sales were down, we believe that this performance continues to rank among the best in the QSR industry.

Our franchise restaurants outperformed Company restaurants for the quarter, as many franchisees have implemented more aggressive price increases on certain products.

Wendy's Company-operated restaurant margin was 16.4% for the second quarter, reflecting a 50 basis point increase versus the year ago.

We achieved this margin growth despite the effect of sales deleveraging, as well as a 90 basis point increase in commodity costs, which was primarily driven by higher beef prices.

Now let me talk about our second quarter same store sales and margins at Arby's.

At Arby's in April, we promoted our Value Menu, supported by national TV advertising for the first time, and began to build transactions.

In May, we promoted our Classic Beef and Cheddar and in June we introduced the Steakhouse Toasted Sub as a combo meal priced as low as $3.99 in selected markets.

Systemwide, same store sales decreased 7.4% in the second quarter.

In addition to the weak macroeconomic environment and competitive discounting that I've already discussed, Arby's was rolling over the successful Roast Burger launch in 2009, and a very aggressive value promotion called Wednesday Freebies.

Few franchise restaurants participated in the Freebies promotion in 2009, so their same store sales were stronger this year compared to Company-operated restaurants.

Arby's systemwide sales were also negatively affected by a decrease in advertising spending in the second quarter compared to prior year.

This was primarily a result of a decision to shift more advertising weight to the second half of 2010.

While we still need to improve same store sales, we are encouraged that Arby's has improved transactions.

As I highlighted on our call in May, we generated positive transactions during the April national TV launch of our new $1 Value Menu, and we achieved flat comparable transactions in the second quarter versus the prior year.

Arby's generated a 13.4% restaurant margin, a decline from last year, due primarily to sales deleveraging and a 65 basis point increase in commodity costs.

This was partially offset by a decrease in advertising expense.

Now let's discuss our international development.

We are building momentum with our international business outside of North America.

We recently signed a development agreement with Wenrus Restaurant Group Limited for the Russian Federation.

Our franchisee plans to develop 180 dual branded restaurants over the next 10 years, and the restaurants will feature Wendy's products plus selected Arby's menu items.

This is a major step in the continued acceleration of our international development strategy, as Russia represents a significant long-term opportunity.

Our new franchisee has extensive knowledge of the Russian food service market and currently operates 28 restaurants in the country.

Chairman and CEO of Wenrus, Alexander Kovaler, has held executive leadership positions in Russia with AT&T and RC Cola and he played a key role in establishing the RC Cola brand throughout Eastern Europe and Central Asia.

Yesterday, we also announced a new development agreement for the eastern Caribbean.

Our new franchisee there will develop 24 Wendy's restaurants in Trinidad and Tobago, and eight other countries over the next 10 years.

This agreement will enable us to expand Wendy's brand presence throughout the Caribbean basin.

Our franchise restaurants in Puerto Rico and the Bahamas generate some of the highest annual volume in our system, and we're building on regional momentum by entering the eastern Caribbean with a highly capable franchise team.

Our new franchisee is led by Dane Darbasie, who has 17 years of restaurant industry experience, including serving as chief executive officer and director of a publicly-traded restaurant management company for 12 years.

We're excited about these international development agreements as we begin to build on this significant growth platform for our business.

Now I'll turn the call over to Steve Hare.

Steve?

Thanks, Roland.

First, I'd like to update you on our second quarter 2010 consolidated P&L.

I'll also provide a review of our capitalization and cash flow and update you on our stock repurchase program and dividends.

And finally, I will provide an update on our financial outlook for the year.

Slide 13 highlights the second quarter results as compared to the prior year.

Consolidated revenues were $877 million during the second quarter of 2010, and decreased approximately 4% from a year ago due to negative same store sales at Wendy's and Arby's and fewer overall restaurants.

Cost of sales was $659 million or 84.2% of sales, which was relatively flat as a percentage of sales compared to prior year and reflected continued improvement in Wendy's restaurant margin.

This was offset by a decline in Arby's restaurant margin.

Commodity costs were approximately 90 basis higher than the prior year at Wendy's and approximately 65 basis points higher than prior year at Arby's.

G&A expense was $97.5 million, which was significantly lower than a year ago.

This improvement included lower integration cost, savings in employee-related cost, and other efficiencies.

We anticipate G&A for the remainder of 2010 to be higher than the first half of 2010.

But for the full year, G&A will be lower than 2009, normalized for the 53rd week.

Depreciation and amortization was approximately $45 million, which was comparable to prior year.

We expect the quarterly amount will increase slightly throughout the year due to our higher level of remodel spending.

Impairment charges of $2.4 million were primarily related to the write-down of fixed assets for underperforming Arby's restaurants.

Interest expense was approximately $34 million for the quarter and was similar to the prior year's quarter.

We executed a new credit facility that will decrease interest cost in the second half of the year by more than $5 million.

As part of this refinancing, we recognized a $26 million loss on the early extinguishment of debt, which reflects the premium required to redeem our 6.25% notes, the write-off of unamortized discount on the redeemed notes, and the writeoff of deferred cost related to our previous term loan.

Investment income included the $5 million pretax gain related to the proceeds received for a note receivable from Deerfield Capital Corporation, the Company that purchased Deerfield and Company from us in 2007.

The tax rate for the second quarter was 42%.

We expect the tax rate for the remainder of the year to be between 42% and 44%.

Net income as reported was $10.7 million or $0.03 per share based on 427 million diluted shares, compared to our net income of $14.9 million or $0.03 per share based on 471 million shares in the prior year.

Slide 14 provides detail on adjusted EBITDA.

Second quarter adjusted EBITDA, excluding integration cost and G&A, was $120.9 million.

The integration costs are largely related to IT rationalization projects and will continue at approximately the same amount in each of the next two quarters.

We do not expect to incur any further integration cost in 2011.

Second quarter adjusted EBITDA increased 3.2%.

Year-to-date adjusted EBITDA, excluding integration cost and G&A and a nonrecurring item, were $212.9 million.

Year-to-date integration costs were $3.7 million, and SSG purchasing co-op expense recorded in the first quarter was $4.9 million.

The year-to-date adjusted EBITDA growth rate was 7.8%.

Next, I'll explain net income and included special items.

Net income was $10.7 million or $0.03 per share and includes integration related cost, impairment charges, and cost related to the new term loan and repayment of debt, which was partially offset by the gain on collection of the Deerfield note.

Total net special charges were $15.2 million or $0.03 per share.

Now let's move to year-to-date cash flow.

Slide 16 summarizes our cash flow for the first half of 2010.

Cash from operations was $102.2 million, and included net income of $7.3 million as well as depreciation and amortization of $91.3 million.

This also included a net decrease in working capital, offset by other non-cash sources of $3.6 million.

Capital expenditures were $52.7 million and were approximately $13 million higher than our spending in the first half of 2009.

Net cash generated from operations was $49.5 million.

We generated $31.3 million of proceeds from the issuance of long-term debt, net of debt repayments, which was primarily as a result of our bank debt refinancing.

We received payment on the Deerfield note receivable, which resulted in cash proceeds of $30.8 million, and we returned $186.5 million of capital to our stockholders in stock buybacks and cash dividends during the first half.

These payments were the primary driver of the $83 million reduction in the cash balance versus year-end.

At quarter end, we had a cash balance of $508.4 million.

We continue to have a strong cash position, which provides us with significant financial flexibility going forward to fund our strategic growth initiatives.

Now let's look at our debt capitalization.

At the end of the second quarter, we had total debt of approximately $1.6 billion and net debt of about $1.1 billion.

Based on our trailing 12 month adjusted EBITDA, our total debt multiple is 3.6 times.

Our net debt multiple is 2.4 times.

As previously announced, we entered into a new $650 million senior secured credit facility, which includes a $150 million revolver and a $500 million term loan.

The proceeds from the new term loan were used to retire the previous senior secured credit facility as well as senior notes due 2011.

Our next significant debt maturity is our 6.2% notes due in 2014.

Now I'd like to discuss stock repurchases and dividends.

The Board of Directors authorized a stock repurchase program beginning in 2009.

We have repurchased 52 million common stock shares for $245 million as of August 6 of this year at an average per share price of $4.69.

That leaves us a remaining authorized buyback of approximately $80 million.

The authorization remains in effect through January 2, 2011, and will allow the Company to make repurchases as market conditions warrant.

Our stock repurchase program reflects the Board's and our confidence in the long-term prospects of the Company.

The Board also recently declared a cash dividend of $0.015 per share or approximately $6.5 million.

This dividend will be payable September 15 to stockholders of record on September 1.

Now I will review our outlook.

For the full year, we are updating our 2010 outlook for adjusted EBITDA to a decline of 3% to 5%, as compared to our 2009 adjusted EBITDA of $412 million.

Our 2009 adjusted EBITDA is normalized for the effect of the 53rd week.

Our 2010 outlook excludes approximately $8 million of incremental advertising spending for Wendy's new breakfast program in the third and fourth quarters.

Our revised outlook includes the following expectations for the full year 2010 -- continued softness in economic conditions for the second half; flat same store sales at Wendy's compared to our previous guidance of positive same store sales; year-over-year margin expansion at Wendy's.

However, we have reduced our outlook to 70 to 90 basis points improvement for the year compared to 90 to 110 in our previous outlook, principally due to sales deleverage.

These numbers exclude incremental advertising spending for Wendy's new breakfast program and the effect of the 53rd week.

Our outlook also includes negative same store sales at Arby's, which we believe will be slightly weaker than originally planned, but still improving on a year-over-year basis.

The negative same store sales will also produce lower than anticipated restaurant margins.

We expect commodities to increase 2% to 3% for the full year, with significantly higher increases in the second half, which will negatively impact our margins at both brands.

We still expect capital expenditures to be approximately $165 million for the year.

Finally, we are reviewing our 2011 outlook and plan to provide an update later this year.

This additional time will allow us to further analyze our sales and economic trends.

Roland?

Thanks, Steve.

Now I'd like to review our second half plans for Wendy's and Arby's, and I'd like to start with Wendy's.

In July, we promoted our line of Premium Bacon Cheeseburgers supported by our Real quality brand positioning.

The month produced negative same store sales, partly because we were rolling over the very successful Boneless Wings introduction in the same period of 2009.

However, we expect sales to improve in August and September and to be positive for the third quarter.

The main reason we are optimistic about the third quarter same store sales is the launch of our new Premium Salads.

Our new salads include the Apple Pecan Chicken, BLT Cobb, Spicy Chicken Caesar, and Baja.

I'll talk more about our salads in a moment.

In September, we will return to a value message by promoting both $0.99 Spicy Nuggets and a $0.99 Small Frosty.

Both of these products have performed very well and will be a good choice for customers looking for great tasting and unique items at an affordable price point, perfect for the back-to-school season when customers historically spend less.

Now I'd like to give you some additional information on our new salads.

As I've already mentioned, in late July Wendy's introduced our completely revamped salad line.

Our total sales mix for salads has more than doubled to 10% in the past two weeks, and same store sales trends versus the prior year have improved significantly since the launch.

When Wendy's launched Garden Sensations in 2002, we were the first QSR to offer a line of Premium Salads.

Since then, many of our competitors have caught up and are now offering improved salads.

It was time for us to raise the bar and provide our customers great new salads with the freshest, premium ingredients and unique flavors.

Some of the premium ingredients in these salads include vine ripened grape tomatoes, Granny Smith and red apples, pico de gallo, avocados, a blend of nine lettuces, and naturally aged cheeses.

Clearly, these salads are in line with our Real positioning.

Now I'd like to update you on Arby's strategy.

This slide highlights Arby's marketing calendar for the next few months.

On July 19, we enhanced our $1 Menu proposition with the introduction of our new Junior Deluxe Roast Beef Sandwich, supported by national advertising.

This was our second national value pillar and we generated positive transactions and a significant positive trend change in same store sales over the past few weeks.

In August and September, we'll introduce for the first time a $2.99 Meal Deal featuring the Junior Deluxe Roast Beef Sandwich, and in October we'll promote both our Classic Beef and Cheddar Combo and our $1 Value Menu, which will include a new chocolate turnover.

Now let me give you some more background on our value strategy.

As we previously mentioned, improving our value perception at Arby's is one of our top priorities.

However, it is important to note that our value strategy is not just about products sold for $1.

We plan to use a three tiered approach to value.

First is entry value, which we've been addressing with our new Value Menu that was implemented earlier this year.

This is a permanent addition to our menu and we'll continue to promote it.

Next is core value.

This entails offering some of our classic favorites such as Beef and Cheddar at a more affordable price.

In August, several markets are testing price reductions on sandwiches and combos, a simplified menu with fewer SKUs, and five new premium sandwiches to include a great new sliced-in-store Angus Beef Sandwich.

This test will also include new menu boards and merchandising touting 30 items under $3 and a marketing campaign featuring the new Menu Makeover at Arby's.

The third tier is premium value.

Our Steakhouse Toasted Sub Combo that we introduced in June is an example of a premium product offered at a great value.

Recent customer feedback indicates that customers are reacting positively to our new Value Menu.

Most importantly, 83% of Value Menu users surveyed said they would visit Arby's again in the next 30 days.

Furthermore, customers who use our new Value Menu have a more positive feeling about the brand than customers who have not yet tried it.

As you can see in the chart, we have made significant improvements in the following attributes -- serves food made with fresh ingredients, has great tasting food, affordable to eat often, serves high quality foods, offers premium quality sandwiches, and good value for the money.

In addition, actual scores from our Value Menu users for both good value for the money and affordable to eat there often were the highest scores we've received in the past 10 years.

Now I'd like to discuss three of our longer term growth initiatives.

At Wendy's, we are currently rolling out our new breakfast menu into our three test markets, Pittsburgh, Kansas City, and Phoenix, and television advertising in these three markets starts in early September.

Our initial sales results even before TV advertising are encouraging.

We will also expand our new breakfast menu into three additional Company and franchise markets in the fourth quarter and we expect to begin a national breakfast launch in late 2011.

We are also continuing to invest in a significant remodel program at both brands.

To date, we have remodeled 22 Arby's and 44 Wendy's and expect to complete 100 remodels at each brand by the end of the year.

Finally, we are investing significant resources in our international business and the early progress is encouraging.

Since the merger in September 2008, franchisees outside of North America have opened 45 new restaurants and we have signed development agreements for a total of more than 400 restaurants.

We are excited about our international expansion in Russia and the Caribbean, and we are actively pursuing new development agreements in Brazil, Japan, and China.

In summary, Wendy's continues to focus on our Real brand positioning, driving product innovation, and maintaining a strong value perception.

Arby's turnaround plan is in the early stages, but we have already seen good progress, improving transactions as a result of our new Value Menu, and in August we will also be testing in several markets a revamped menu and reduced prices to address core value.

We are investing in long term growth by expanding our breakfast program at Wendy's, remodeling Wendy's and Arby's restaurants, and increasing our international presence.

And we continue to generate strong operating cash flow and have approximately $500 million of cash on our balance sheet to fund our strategic growth initiatives.

Now I'll turn it back over to John Barker to cover Q&A.

John.

Okay, Roland.

Thank you.

We would now like to ask you all to begin queueing up for questions if you have them.

We have large number of participants on the call today, so we do have that you limit your questions if you can and we'll get you back in the queue.

Operator, Melissa, if you could then open up the phone lines for questions, we would appreciate it.

Thank you.

(Operator Instructions).

Your first question comes from Jeffrey Bernstein of Barclays Capital.

Great.

Thank you.

Two questions.

One specific to Arby's.

I think relative to expectation, the comp was in line and margins actually a little better.

Just wanted to drill down a little bit on the mix.

I know you've been pushing a lot of the $1 Menu.

Wondering if you could talk about the mix, perhaps, between the $1 Menu versus the core and what you think the impacts to the margins has been already specific to that $1 Menu mix and where do you think that will stabilize for Arby's?

And then I have a follow-up question.

Good afternoon, Jeff.

Sure, I can do that.

Let me talk about the Arby's Value Menu in a couple different areas.

We'll talk about mix, check, and margins.

First of all, we're mixing pretty much exactly where we expected, which is right at about 15% of our revenue.

Our average check for the Value Menu is about $6, which is also what we expected.

The overall impact on our check is about 9%, which is right in line with what we expected, which we talked about between 8% and 10%.

And finally, the margin impact from the Value Menu is about 50 basis points, which is again what we expected.

We advertised it heavily, as you know, in April.

We came back and advertised it again heavily in the middle of July and beyond, and I don't see any reason why these numbers would change materially as we go into the future, leave it on our menu as a permanent item as I mentioned, and continue to promote it -- predominantly, probably, with new items that we add to the menu.

Just as a follow-up on that.

The comps necessary to neutralize the margins at both brands, just wondering where you stand in terms of what's needed, considering where the comps have been now, as margins held in.

Just wondering what is the level that you need to have flat margins and perhaps what's the pricing component expected within there?

Well, Jeff, quite honestly, as you know, we've done a very, very good job over the last two years of improving margins at Wendy's and also of reducing our G&A, and those two factors has obviously allowed us to stay in the game, and more times than not we've been able to beat the projections of the Street.

As we go forward, there's less margin improvement that we'll be able to enjoy at both brands, and clearly we'll need some sales improvements to ensure that we can stay level with that.

How much sales improvement we will need will be dependent almost entirely on what happens economically with commodities and labor and other factors that really affect our P&L.

But generally speaking, we talked in the range of 1 point to slightly over 1 point keeps us fairly neutral.

Thank you.

Your next question comes from Jason West of Deutsche Bank.

Thanks.

Just want a clarification and then one question.

Just want to clarify that Wendy's comps are currently in positive territory.

Sounded like that was the message as of late July into August, you are positive there.

And then secondly, you could talk a little bit more about the new menu you're testing at Arby's.

You're talking about lowering some prices on some core items, a lot of new products -- just what's the magnitude of the change we're talking about there and what are the thoughts from the franchisees been on that?

Jason, let me just get this down, so I don't forget them.

First of all, let's talk about Wendy's same store sales, which I think was your first question.

As you know, from our press release and what our comments covered today, July started with very soft sales at Wendy's.

We were rolling over a very tough promotion, one of our more successful promotions of 2009, the introduction of Boneless Wings.

And then in middle to late July, we launched our new salads, got it on air, people started to hear and think about it.

Salads really aren't a build that you would expect when you launch a low price item, which typically has a more immediate response.

Salads, we believe, are a slower but longer term sustainable improvement in our sales, based on that customer coming in and trying it and the coming back and wanting to repeat their usage on a regular basis.

So as I mentioned, we saw sales significantly improve in the latter part of July behind the introduction of salads, and what we suggested and what we continue to believe is that we will have positive same store sales for Wendy's in the third quarter.

Now, from an Arby's perspective, I talked about the different tiers of value that we need to address, certainly entry value and core value and premium value.

We have done I think a very good job of addressing the first tier which is entry value, which is really more about affordability, which is our well-engineered and very well-accepted new Value Menu which has come back in July to significantly change the same store sales trend and get us into positive transaction area, which is pretty exciting.

As I think you all understand, any turnaround starts with more customers frequenting your brand, and that's exactly what we're seeing from a transaction standpoint.

Now, we're not stopping there, because we don't think that value's just about, as I mentioned, $1 and $0.99 items, and we've moved into understanding core value with our customers.

And in that regard, what I've mentioned to you today is a couple of market tests that we plan to open up with advertising in August that really gets beyond entry value, and as I mentioned we're taking a look at the prices all throughout our menu.

We're looking at reducing certain prices on some of our menu items.

We're looking at simplifying our menu so it's easier for our operators and easier, quite honestly, for our customers to understand.

We're adding five new premium sandwiches, which are pretty exciting, to include the one I mentioned today which is in-store-sliced Angus Roast Beef Sandwich, which is fabulous.

We're going to change our menu board so the consumer understands how to buy our products and also to make it easier for them.

We have some merchandising that is touting the fact that this new test actually has 30 items, and I'm not just talking about drinks, I'm talking about 30 Real items under $3.

And we are also, obviously, relayed this to the consumer with new advertising.

So, we're pretty excited about what we're calling a model market test.

Our franchisees have heard about this over the last month or so.

We've been working closely with the AFA Board, which is the Board of Franchisees that directly provides us guidance from a marketing standpoint.

I think they're encouraged about some of the results that have allowed us to come to the conclusion that we need to make some of these changes.

And since we're doing it -- these in Company markets and certainly we're funding this test, they're encouraged to see what the results are.

And any market test like this, I suspect that some things will work particularly well, some things we'll learn, and we'll iterate.

But I think a number of great ideas will come out of this market test which will allow us to, early into 2011 and maybe late in 2010 be able to start to implement some of these core value improvements that will further improve transactions and begin to get us into a positive same store sales environment.

Okay.

Thank you.

You're welcome.

Your next question comes from John Glass of Morgan Stanley.

Thanks.

I wanted to first ask about your EBITDA guidance and I guess what is implied for the second half.

I think at the middle of the range it implies about a 25% decline year-over-year versus your reported second half of 2009.

And I understand your comments about comps being weaker than you thought, but I guess they're going to be better than the first half comp.

I guess that's one question.

At both brands you still expect better comps in the second half or at least equal to versus the first?

Is it just food costs that is going to drive this materially down or did you defer some expenses in the first half that come back in the second half, and that's why there's such a decline in the back half?

Hi, John.

Let me see if I can explain that a little bit more clearly.

What you pointed out I think is exactly correct.

We expect our comps in the second half to be better than our comps in the first half, based on some of the exciting promotion of products and ideas that we've launched in July, the Value Menu for Arby's with the new product, and our new Premium Salads at Wendy's.

We also have what we think is a strong and very exciting marketing calendar for both brands.

I shared some of those items with you today.

Obviously, we don't want to go much past what we've shared, obviously, for competitive reasons.

But that's why we continue to be optimistic about comps first half versus second half.

That being said, we were more aggressive as we looked at our 2010 guidance to begin with, based on the fact that we thought that there would be a little quicker recovery in the economy than everyone had seen.

As you remember, we talked about the fact that we will need to see some economic recovery to enjoy the same store sales that we were forecasting, and so while they are positive second half versus first half, they are less than we initially expected for both brands from the standpoint of what drove our initial 2010 guidance.

Obviously, a couple of things are happening to margins.

One is that with less same store sales, that puts a little pressure on our margins and we're not able to enjoy the improvement that we had originally forecasted.

Secondly, we've seen commodity costs creep up in the third and the fourth quarter that we expect to also have an impact there.

The combination of those things is what's causing us to take our guidance to where we laid it out today.

And then as you've experimented or tested breakfast, do you have any greater visibility on if you need more investment in 2011 beyond the $8 million you talked about this year, either in advertising or training or any other element that might cause you to think you need to put more money, not other than capital, into this launch?

Well John, I think the short answer to that question is no.

As I think you all have realized over the past couple of years, as you tracked this merger and the plans that we have shared with you, we have taken a very systematic and disciplined approach to not only revamping the entire breakfast line, but testing it in such a way that we are confident in what the results will be.

I've been asked many times, wow, if this is really a big, exciting opportunity, why don't you get it out there earlier?

And nothing would make us happier than to put us out there earlier than what we forecasted.

However, we had to really revamp the entire breakfast menu.

I don't think there's a single menu on our new, improved breakfast menu that is the same as the previous menu.

We've tested this extensively with customers.

We've gotten great feedback.

Matter of fact, one of our products in a top two box score -- now you all understand that top two box scores are the way that you actually go look at products to generate what you believe they might produce when you put them into a store.

The top box being customers after eating the product say we will definitely buy the product.

The second box being we will probably buy the product.

The industry standard is to look at the top two boxes, get a percentage, and look at what that percentage is compared to historical norms.

By the way, hurdles for us tend to be around 75%.

In the 80s is very solid.

In the 90s is not seen that often.

One of our products on our breakfast line actually got a 100% top two box score.

So we feel very good about the quality of the products.

We also, as you know, had to validate our positioning, which we've done and [rolled] out last year which is really about Real quality fresh ingredients.

So John, we feel very good about the menu that we're rolling out from a breakfast standpoint.

David Karam, Steve Farrar, and the entire operations team have done a fabulous job of putting this into an operational environment where our customer service workers and managers can actually manage these products successfully, still provide great speed of service -- speed of service is one of the most important aspects of the breakfast day part.

And so we think that operationally the training that we dedicated to it and are currently dedicating to it as we're rolling this out right now in our three test markets as I mentioned is what we need to make sure that the customer has a good experience.

And we have dedicated what we think is a significant amount of advertising, as we highlighted today from the standpoint of the $8 million, to get the word out there that in these markets, customers can come in and have the best QSR breakfast in the marketplace.

Now, it's going to be important that once we get trial, we get repeat.

And that repeat as you alluded to is really all about making sure the customer gets great service, fabulous products, and friendly service.

We feel confident that that's in fact what's going to happen.

Now, we're going to expand our three markets that we've been holding as incubators later on this year into three additional markets, both Company and franchise.

And then in December we'll begin to advertise in one of those markets and probably early next year we'll advertise in the other two.

We will then again take a disciplined and systematic approach of reading the results of not only the financials, but also the feedback from the consumers.

And by the middle of the year I think we'll have very, very good financial data, which quite honestly I think is going to be very exciting.

I mentioned in my prepared comments today that while we have had no TV on air yet with our new breakfast menu, we have seen an improvement in sales almost immediately after putting it in.

I know the results are early.

They're so early, we're not willing to talk about them.

But it gives us some confidence that we are on the right track and this will continue to be a significant growth opportunity for us in the future.

Thank you.

Your next question comes from Joe Buckley of Bank of America Merrill Lynch.

Thank you.

Maybe a follow-up on breakfast first.

Just bring us up to date, when was this menu rolled out and how many versions of the breakfast menu have we had?

And do you think this is the one that you want to at least push into, obviously, push into new test markets?

Do you expect more variation on the menu into the new test market?

Joe, good afternoon.

We began to look at our breakfast products almost immediately upon the merger, and we went back and looked at the old data and I've covered this many times.

And I don't mean to be reiterative.

The top two box scores on almost all of the previous breakfast items were below 70% and all the data would suggest that that is not a score that is going to produce the financial numbers that you would like.

And so, Joe, we began to one-by-one not only improve some of the products, but to design brand-new products like the Artisan Baked Muffin with soft cheddar cheese and a fresh-cracked egg, and -- I'm giving you a commercial, I realize, but we're pretty excited about.

We've also added a Panini Sandwich.

We improved our biscuit.

We've got this fabulous oatmeal bar -- I mentioned the top two scores box on that a moment ago -- and we've gone out with a great coffee supplier and done a ton of research on coffee to make sure that the specialty coffee that is brewed for us is as good as consumers expect.

So, it's taken some time.

Clearly, to make sure that we got out of the test kitchen and into the market, we began to expand that menu into some of our restaurants in Columbus earlier this year for a couple of reasons, but not the least of which was to make sure we got the operational shakedown to understand what work, what didn't, what could move, and what the labor requirements were.

And obviously, based on that and consumer feedback, we iterated and improved some of those items.

Over the period of September to 2008 up until early this year, we actually took a couple of items and put them into our current test markets to get a little bit of a read on them.

For example, one of them was the Panini Sandwich to see how big it needed to be and what ingredients needed to be on it.

And we made some improvements based on that feedback.

But I could tell you, we are very confident about the current breakfast menu that we are rolling out into our three test markets.

To answer your question specifically, we began that roll-out earlier this quarter.

Today, I'm going to give you a little bit of a guess, we're probably in 30 to 50 restaurants in Pittsburgh, Kansas City, and Phoenix.

By the end of August, we'll be into about 150 restaurants, which really are all of those markets.

And that's when we will start the advertising.

And then finally, we will expect to be in about another 100 restaurants by the end of the year with this breakfast menu.

Now, look, we're not closed to new ideas, and if consumers tell us things about this menu line that we need to improve on or change or add, we will certainly take their feedback.

We're here to serve our customers at the end of the day, not provide them what we think they want, but what they do want.

So far what they've told us is these are the kind of products they want to come in and enjoy a Wendy's breakfast.

Okay.

Then separate question, on the Wendy's Company-operated comps, what's the breakdown between check and traffic?

Traffic has -- I'm trying to get the numbers as we're speaking here, Joe.

We can follow up with you specifically, but I'll give you a general overview.

Again, looking at July, it's a tale of two cities.

So I'm just going to talk about the second half or the second part of July, which is really, I think, indicative of the current trend and what we expect to happen from the standpoint of the quarter.

Traffic remains slightly down over the last couple of weeks.

What we've enjoyed, certainly, with salads is a great mix.

We're up to 10% mix on salads, which has more than doubled our salad mix before we started this -- an indication that consumers have clearly accepted these as great new products, and improved check because we're charging a Real price for a great Real product.

We think it's a very fair price which offers great value at $5.99, and certainly less than what you would pay at a fast casual restaurant or a casual restaurant for what we think is a comparable quality salad.

But we have enjoyed some check increase since we have launched salads.

Okay.

Thank you.

You're welcome.

Your next question comes from Michael Gallo of CL King.

Hi.

Good morning.

Most of my questions have been answered.

Just wanted to touch on the store-by-store pricing initiative that you've been going through -- is that something you still expect to launch here and roll out in the second half of the year?

And have you assumed any incremental improvement off of that?

Thank you.

Good afternoon, Michael.

Michael is referring to the strategic pricing initiative that I've spoken about several times, which is focused at Wendy's.

We've been spending a fair amount of time and effort -- in fact I think we have -- someone make sure I'm not misleading him.

I think we put over 1 billion lines of code into our model to understand exactly what the elasticity was of different products in different parts of the country.

So, a very exhaustive research study that gives us very good indication of elasticity of products throughout our menu.

That takes some time, as you can imagine.

But we are coming to the point where we are actually in market, testing some of these new kind of pricing expectations in a number of our markets, and the initial results are pretty encouraging from the standpoint of how our consumers are reacting to it.

By the way, it's a combination of lowering slightly some products and raising slightly other products, but the net impact is that it provides us an additional increase in check average based on what would be an increase in overall price.

And so we are reading those results in the next months to come.

Michael, I do expect that we'll get some small benefit from that later this year, based on our plan to begin to roll this out.

But I see that the majority of the positive impact is likely to happen in 2011 and beyond.

Okay.

Any initial feel about just sort of general framing as to how big an impact this could have?

I think at some of your competitors who had already done it, I think there was -- my recollection was something around a 2% to 4% comp increase from it.

Well, 2% to 4% is pretty aggressive and I would certainly sign up for that immediately.

But I don't believe that -- that's probably conservative, and we try to take a conservative approach.

I would say it's a reasonable expectation to get from 1% to 2% increase based on this initiative, which, quite honestly, I'll also take because that's pretty exciting.

Thanks a lot.

Your next question comes from Rachael Rothman of Susquehanna.

This is Jake Bartlett in for Rachel.

I had a question on your cash balance.

If you could prioritize your plans for it, whether it's share buybacks, dividends, the remodels?

If you could lay out your prioritization?

Sure, Jake.

I'm going to turn that over to Steve.

I think in terms of our priorities, they really remain unchanged.

From a management perspective, obviously, the strategic growth initiatives, the long-term investments that Roland has talked about I think are our first priority.

Looking at -- obviously we're in the middle of a pretty aggressive remodeling program this year that will continue going forward at both Wendy's and Arby's.

The second area of opportunity we think is around the breakfast launch that we're talking about that has a capital component to that.

And then thirdly, I think the international growth as we look at some of the other markets on the radar, including China and Brazil, there may be an opportunity there for us to do some Company store development in those markets or through a joint venture that would be a use of capital.

So those are, I think, all opportunities we would like to invest in, because we see those as pretty attractive long-term return opportunities for us.

To the extent that we then have excess liquidity, obviously we've used it fairly extensively in terms of our stock buyback program historically.

And so that again would be another consideration for using some of the excess cash that we have on the balance sheet.

You recently had a Board meeting that you didn't increase the authorization -- I guess you have $80 million left, but you purchased more than that in the last quarter or two.

Is it fair to say that that's -- you passed up that opportunity to increase it?

Well, we still have -- we've authorized -- since the program started in 2009, we've authorized $325 million of total buyback.

And at the last Board meeting we still have $80 million of dry powder available under that program, and I think that was considered sufficient for the near term.

Lastly, for the remodel program, do you expect that to accelerate meaningfully in 2011 (inaudible)?

I think it would be more of a continuation.

We're going to do 100 units this year on the Arby's side, 100 units on the Wendy's side.

The average investment is about $300,000, so these are significant upgrades to the facilities.

What we want to do, though, is monitor the results and the returns, what kind of sales increases we get as a result of this investment.

And I think that will help us decide whether we want to accelerate the program.

My guess is we would continue it at a similar rate.

On the Arby's side, we have quantified pretty much a three year plan to get to about 75% of the system up to our pinnacle image.

And I think we're in the final steps, I think, of quantifying the Wendy's program in a similar three year program.

But a lot of it, we want to see the actual results we get and we'll fine-tune the program as we go.

But I think that would -- that's going to be a good investment area for us for the foreseeable future.

Waiting to see how yours are turning out (inaudible)?

I'm sorry, Jake, you have to speak up.

We can't hear you.

Are your franchisees also participating in the remodels or are they waiting to see what your results are?

Give us an idea.

I think what we're seeing is on the Wendy's side, we are seeing a fair amount of reinvestment back into the system by the franchisees there.

We're also seeing some new unit activity on that side.

On the Arby's side, I think a more cautious approach, obviously, given the recent results we've had there.

I think until we can see the same store sales start to stabilize and see the turnaround strategy move further down the track, I think you'll see a more modest reinvestment in the system as a result there.

But clearly, one of the things we want to do is share the returns that we get on our remodeling program in the Company stores, and to the extent that's a positive result, I think that will be a catalyst to the franchisees on both brands to follow our lead, and that's certainly one of our intentions.

Thank you.

Your next question comes from John Ivankoe of JPMorgan.

Two, I think, short ones.

In the past, QSR companies that have driven their business through salads have had a difficult time sustaining that as a percentage of their menu mix.

I think about Wendy's as one of them, McDonald's maybe being another one where the products have a lot of big splash, and maybe it was a slow build but it was also a slow decline over time.

So I just wanted to get your thoughts about how you could sustain that business?

And then secondly, if I may, given the comps and given higher commodities, your store level margins at both Wendy's and Arby's as you mentioned were very, very good.

I was hoping to get some more specifics of how you're able to achieve those margin gains in the second quarter, especially as you've owned this business now since I guess the end of 2008.

Good afternoon, John.

Let me start with salads.

Clearly, salads is a product that's been around for some time.

The QSR industry has been in and out of salads a couple of times, and I think it's fair to take a look at that business both improving and waning over a period of time.

If you go back and take a look at the Wendy's business in particular, I think you'll see that Wendy's has always been a leader in salads, all the way back to the salad bar days, quite honestly, which obviously don't make sense for us anymore.

I mentioned the launch of Garden Sensations in 2002.

While I also mentioned that our competitors caught up with us over the last couple of years, we had a nice sustained run on those great salads over a number of years that had a very positive impact on the business.

I think where some of the salad business from the QSR business has gone over the past couple of years, quite honestly, is to other brands outside of QSR like fast casual.

For example, take Panera, which is a brand that's doing particularly well and does an awful lot of their business in salads.

I think in this particular case because we so carefully have crafted our salads that the quality of ingredients and freshness of fast casual and in some cases casual brands, I think that we will certainly separate ourselves from QSR.

And if you want a great quality salad at a great price in a hurry, Wendy's is going to be, probably, the only reasonable choice.

It will take some time for people to realize this.

Because quite honestly, you've got to eat a salad until you go, wow, that's really great.

I've heard nothing but positive feedback from people -- in fact, lots of unsolicited emails from friends from the past that say, I tried those salads, they're really great.

That's why I think we're going to have a slower than average from the comparison of price point build, but certainly I think it's a sustainable positioning that we'll be able to have with salads in the future.

I would say one other thing about that, and that's that consumers continue to need news to interest them to come back in on a regular basis and try products.

And so, you could launch the best product ever, and if you do nothing to it over a period of time, you're likely to have a wane of interest in that particular product.

We already have a couple of new salads, seasonal salads that are also equally as good as the four that we launched that we will bring in and out at the appropriate time to make sure we continue to have a lot of interest on our new salad line, because we think based on the trends of America, things that we all talk about on a regular basis, which is eating more healthfully, are certainly going to sustain a brand like Wendy's that is known for great quality food, that can continue to provide great quality salads, and update those salads with new news on a regular basis.

On the margins question, I think you pointed out clearly the issues that we are dealing with.

And I would say we are very proud of our ability to run very solid P&L stores.

It's been a hallmark of both of our brands for years and years.

Through the efforts, as I mentioned, of David Karam, our President; and Steve Farrar, our Chief Operating Officer, all the Senior Vice Presidents in the field, all the way down to the restaurant managers and the restaurant teams have really embraced this concept of being very careful with every single $0.01 that they spend.

We made great improvement on theoretical versus actual food cost.

We've made great improvement in using our labor as efficiently as possible.

We made great improvement on not spending monies from a controllable standpoint on things that we didn't need, or spending them more efficiently.

We're also getting a little benefit from the standpoint of our new co-op that's in place.

And while we haven't gotten the benefit yet, I think we will continue to look forward to getting benefit from our new SSG co-op that I talked about on our last call, that as different RFPs come up for review, I think we'll be able to have the benefit of some reduced cost as we buy for 10,000 stores versus just 6,000 or 3,000.

So, that's why we've been able to be successful and that's why we continue to think that we'll be able to be successful in the future.

But I guess the point is that there wasn't any new initiative in the second quarter per se, it was just you guys are continuing to do a very good job of managing and controlling costs in general?

Well said, John.

I think continuing doing a very good job.

All right.

Thank you.

Your next question comes from Sara Senatore of Sanford Bernstein.

Hi.

Thanks.

Just a couple of quick follow-ups.

First on the last question, some of that or some of the margin improvement that you got was from lower -- from deferring advertising.

And I was hoping you could talk a little bit about -- when you talk about advertising, it seems to have a big impact.

What is the thinking behind the timing of it and in terms of relative to new products versus just continually having the message out there?

And so that's part one.

Then the other actually follow-up question was more about the international business, and in particular thinking about -- it's mostly licensed at this point I think, or partnerships, and yet I think you've been talking about spending CapEx even -- not just prospectively, if you opened Company-owned stores, but even recently.

So, can you give me a sense of what piece or proportion of the CapEx is international and when do you expect to get -- what's the payback period or how long does it take before those get profitable?

Good afternoon, Sara.

I will try on both of those.

First of all, let me talk about timing of advertising.

As you know from our prepared comments, in the second quarter, for both brands, we had some benefit from the fact that advertising was less in this quarter than what it has been as a proportional percentage in the second quarter in previous years.

That's a conscious decision.

We look at our calendar throughout the year.

We make media buys upfront to make sure we get the great efficiencies of buying it upfront.

But we also spend our advertising against what we think is going to be the most successful or the most impactful promotions that we have.

Clearly, it's going to be more efficient to put more advertising dollars against our key product launches than evening it out all throughout the year so that every single promotion gets the same treatment, which we think would provide significantly fewer returns.

On the Arby's basis, clearly we have moved some advertising to the back half, because in the full year for Arby's, we had one national pillar in the first half, and we're going to have two national pillars in the second half.

And we think that that is a better way based on, one, not only the new product pipeline that we see coming out, but some of the new ideas that we want to make sure that we support as strongly as possible from an advertising expenditure.

And at Wendy's, it's a similar story.

We took some advertising out of the second quarter because those particular products that we advertised were certainly products that had performed well in the past and the customer understood, but not nearly the impact that we would expect over a significant brand-new line of products like salads.

So we amassed our resources in the third and fourth quarter behind the salad launch and, quite honestly, behind a couple of other exciting new product launches that I'm not yet prepared to talk about, later on in the year.

From an international standpoint, yes, the majority of our business now is licensed and so clearly that is not capital intensive.

That's a good thing.

To answer your question right up front, of our capital allocation that we have talked about for this year, relatively none of it is focused on international or that that is very immaterial.

What we're referring to as we talk about an opportunity for growth in the future is that -- I mentioned these three countries today, three big, great opportunities for us to expand where we have been already three or four times from a visitation standpoint.

In fact, our head of international is in Brazil today as we speak.

And we think there's an opportunity in those countries for a combination of some Company-operated stores, maybe a possible JV or possibly a small acquisition.

So those three things, obviously, would cause us to use some capital.

I can't identify it yet, but if we are going to expand international and grow this part of the business as quickly as we expect, it will take some of these more aggressive decisions as we find the right partners or as we find possibly the right brands to expand our sales and profits in the short-term.

Thanks.

Melissa, this is John.

We'll take one last question.

We're past 1 o'clock.

One last question for the call.

Okay.

Your final question comes from David Palmer of UBS.

Hi.

Thanks for taking the question.

Question, I guess this goes back to some of the stuff we were talking about with check and premium innovation like the salads.

Seems like the Holy Grail in fast food these days is getting some sort of premium check-building innovation and marketing going.

You certainly seem to have that lately in recent weeks with salads at Wendy's.

Is premium going to be continuing to be the focus there at Wendy's?

Do you think you can keep that going, building on the salads and in some of that stuff you're talking about in the pipeline, is premium going to continue to be the direction there?

And then over on Arby's, my gut is that your check declines are pretty rapid as you advertise nationally that $1 Menu, and that it would certainly be a big hit for your sales if you could stabilize the check.

Any thoughts about the receptivity to premium on that brand would be interesting to hear as well.

Afternoon, David.

Yes, I'll try both of those and I'll do it hopefully relatively quickly in interest of all your time.

I think you point out an excellent issue in the QSR industry today, which is this concept of, can you sell a premium product?

I can tell you that, as I mentioned, the majority of almost all transactions over the past number of quarters has been driven by deals.

And while I'll take those transactions, those are tough transactions from the standpoint of profitability.

We believe that you can, by the way, at both brands drive check with premium products as long as the products are really premium.

You can't fool the customer by calling something premium just by putting a fancy name on it.

It's got to be a great quality item like our salads.

It's got to be 14 types of lettuce, aged cheeses, and fresh vegetables, things that really make it a premium product, and people are willing to pay a little bit of a premium price based on our research if, in fact, you deliver on the product.

By the way, we think our hamburgers and other products on our line are also premium, and we can also enjoy what we think are great prices that are still good value from that standpoint.

I do think that we're going to be able to see that at both brands.

I mentioned also this concept of in-store-sliced Angus Roast Beef Sandwiches, which I think is another real premium item, not just something that has an interesting name on it at the end of the day.

From an Arby's standpoint, certainly, as we significantly advertise our Value Menu a couple of things happen, most exciting of which, transactions go up almost immediately.

We're in positive transaction territory at the end of July, which is a significant trend change over what we've seen in the past.

People tell us they love our products, and if we can sell them to them at a more affordable price, they'll come in more often.

By the way, as I mentioned earlier, that check decline has been only around 8% to 10%.

It's right at 9%.

We think that that's very acceptable from the standpoint of the incremental transactions that we are receiving.

As a matter of fact, our average ticket for people using the Value Menu is just under $6.

Many brands would love to have a $6 check average for their entire product line.

We believe we have hit on something at Arby's that not only, as you know from the data, has significantly improved our value scores over the past quarter, also significantly improved our quality scores over the past quarter, but something we can sustain and then move on to the other of two areas of value that I think are important, which is the combination of core value and premium value.

That's how we see it, David, going forward.

Thank you everybody.

This is John.

Kay and myself and Steve Hare will be talking to several of you today and tomorrow and we look forward to catching up in the future.

Thank you for joining the call.

Thank you all for your time.

Thank you for participating in today's conference call.

You may now disconnect.